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SEC's Turf Threatened by Banking Regulators

SEC commissioner says Fed and other agencies use the FSOC to influence rules for money market funds, including the proposal to impose a floating NAV.

U.S. banking regulators are crowding out the Securities and Exchange Commission (SEC) on money-market mutual fund rules and other decisions that affect how capital markets are overseen, a top securities regulator said today.

Other agencies, including the Federal Reserve, have used the Financial Stability Oversight Council (FSOC) to influence rules for money-market funds and potentially tighter regulation of asset managers, SEC Commissioner Michael Piwowar said. The council recommended new rules for the funds in 2012, after the SEC couldn’t agree on a new proposal.

“The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and other member agencies,” Piwowar said in a speech to the U.S. Chamber of Commerce.

Opposition from Piwowar, a Republican appointee, could complicate the SEC’s ability to adopt a rule that would impose a floating-share value on the riskiest money-market mutual funds or allow them to suspend redemptions in times of stress. The SEC issued the proposal in June, after the FSOC’s recommendations were issued and before Piwowar joined the commission.

While money funds don’t necessarily have “structural vulnerabilities,” regulators should “mitigate the first-mover advantage enjoyed by investors who run during times of heavy redemptions,” which can lead to losses for other investors, he said.

Systemic Importance

The FSOC was created by the 2010 Dodd-Frank law to monitor potential risks to the financial system and prevent another crisis. The council, which includes the SEC, has designated three non-bank financial firms as systemically important, which requires heightened Fed oversight.

In September, the Office of Financial Research, a department of the U.S. Treasury that advises the FSOC, wrote in a study that asset managers could pose threats to the U.S. financial system when reaching for higher returns, herding into popular asset classes, or amplifying price movements with leverage.

Piwowar, who joined the commission in August, said FSOC allows too many representatives of the Fed to attend meetings, while limiting the SEC’s participation to its chairman, Mary Jo White. Piwowar said his request to observe FSOC meetings was turned down.

In an interview today, White called the FSOC a “tremendous step forward in bringing regulators together to discuss issues, which I think was largely missing before the crisis.”

“The prudential view is a fundamentally different view of the world than what the market regulators have,” Piwowar said. “We tend to have a view of the world that the markets generally work and the answer to a lot of the questions is in terms of disclosures because then investors can make more informed decisions.”

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